This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. The statements contained in this Quarterly Report on Form 10-Q that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act including without limitation, statements regarding our expectations, beliefs, intentions or strategies regarding the future. All forward-looking statements included in this Quarterly Report on Form 10-Q are based on current expectations, estimates, forecasts and projections about the industry in which we operate, our beliefs and assumptions. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Highlights

During the first quarter ended April 30, 2008, we realized a net pre-tax gain of $32.9 million upon the sale of substantially all of our assets to KMC. We continue to experience a downturn in revenue due to lower demand for the technology we offer from year to year. Consolidated revenues for the third quarter of fiscal year 2009 declined 78.0% from the third quarter of fiscal year 2008 and decreased 51.1% from the second quarter of this fiscal year. Product licensing revenues decreased 73.6% compared to the third quarter of the previous fiscal year as a result of a decrease in block licensing revenue. Engineering services and maintenance revenues declined 86.8%, as 81% of our engineering work force was transferred to KMC as a part of the sale to KMC. The transaction was primarily due to downward pricing pressures arising from an increasingly competitive global market, as well as substantial pressure on our OEM customers to consolidate. The sale to KMC and the financial resources that it has provided is allowing us to pursue opportunities outside the imaging marketplace. The overall decrease in our revenues was primarily attributable to declines in the demand for our technologies, third party technologies that we license to sell and the requirement for traditional engineering services.

During the first nine months of fiscal year 2009, we have experienced a significant number of changes:

• On April 30, 2008, we consummated the transactions contemplated by the Asset Purchase Agreement, dated as of January 9, 2008, between KMC and Peerless, pursuant to which we sold substantially all of our IP to KMC, transferred to KMC thirty eight (38) of our employees, licensed the IP back from KMC on a nonexclusive, worldwide, perpetual and royalty free basis subject to certain restrictions, entered into a sublease pursuant to which we are subleasing to a subsidiary of KMC 16,409 square feet of office space at our executive offices for a period of forty (40) months at a monthly rent equal to the allocable portion of the rent and common charges payable by us under our lease for the property, and terminated substantially all of our existing agreements with KMC. As consideration for the sale, KMC assumed certain of our liabilities, and paid us approximately $37.0 million, less a holdback amount of $4.0 million relating to potential indemnification obligations. The cash proceeds generated from the KMC transaction will position us to continue executing our strategic plan.

• We are reviewing our staffing requirements to achieve the goals of properly supporting our existing customer base and meeting the requirements of a publicly traded company and have reduced our staffing levels to a total of 12 as of November 30, 2008. This represents a 74% staff reduction from the levels that existed subsequent to the KMC sale.

• As result of the review of costs and risks associated with the all-in-one, or AiO, market we have decided to suspend the activities of Cue Imaging Corporation, our subsidiary that was formed in January, 2008. In connection with the suspension of Cue Imaging Corporation, Andrew Lombard, Vice President, Corporate Development and President of Cue Imaging Corporation, was given notice of termination and is being paid severance in accordance with the terms of his employment agreement.

• In 1999, we entered into a PostScript Software Development License and Sublicense Agreement, or the Adobe License Agreement, with Adobe Systems Incorporation, or Adobe, that expanded the application and integration of our respective technologies. The Adobe License Agreement expired on June 30, 2008. The Adobe License Agreement was amended to provide a period of twenty-one months following the expiration of the agreement in which we continue to license and provide services to our existing OEM customers.

Our inability to implement our acquisition plan as well as the declining sales trend of our existing licenses, downward price pressure on the technologies we license, uncertainty surrounding third party license revenue sharing agreements, downward price pressure on OEM products and the anticipated consolidation of the number of OEMs in the marketplace, may have a material adverse effect on our business and financial results. See "Item 1A. Risk Factors."

General

We continue to generate revenue from our OEMs through the licensing of imaging solutions. Our product licensing revenues are comprised of both recurring per unit and block licensing revenues and development licensing fees for source code or SDKs. Licensing revenues are derived from per unit fees paid periodically by our OEM customers upon manufacturing and subsequent commercial shipment of products incorporating the technology which we license. Licensing revenues are also derived from arrangements in which we enable third party technology, such as solutions from Adobe or Novell, to be used with our OEM partners' products.

Block licenses are per-unit licenses in large volume quantities to an OEM for products either in or about to enter into distribution into the marketplace. Payment schedules for block licenses are negotiable and payment terms are often dependent on the size of the block and other terms and conditions of the block license being acquired. Typically, payments are made in either one lump sum or over a period of four or more quarters.

Revenue received for block licenses is recognized in accordance with SOP 97-2, which requires that revenue be recognized after the following conditions have been met: (1) delivery has occurred; (2) fees have been determined and are fixed; (3) collection of fees is probable; and (4) evidence of an arrangement exists. For block licenses that have a significant portion of the payments due within twelve months, revenue is generally recognized at the time the block license becomes effective assuming all other revenue recognition criteria have been met.

We also have engineering services revenues that are derived primarily from adapting the imaging software and supporting electronics to specific OEM requirements. Our maintenance revenues are derived from software maintenance agreements. Services and maintenance revenues currently constitute a small portion of total revenue.

Historically, a limited number of customers have provided a substantial portion of our revenues. Therefore, the availability and successful closing of new contracts, or additions to existing contracts with these customers may materially impact our financial position and results of operations from quarter to quarter.

The technology we license has addressed the worldwide market for monochrome printers (21-69 pages per minute) and multifunction printers ("MFP") (21-110 pages per minute). This market has been consolidating, and the demand for the monochrome technology and products offered by us declined throughout fiscal year 2008 and the first three quarters of fiscal year 2009.

The document imaging industry has changed. Lower cost of development and production overseas increasing complexity of imaging requirements has resulted in us not being able to effectively compete in this environment. As a result, we sold our intellectual property and transferred 38 of our engineers and support personnel to KMC. Although as a part of the transaction we have retained the right, subject to certain restriction, to continue licensing and supporting the imaging technology that we had previously developed and continue to license third party imaging technologies, we are currently pursuing other potential investment opportunities. The strategy calls for aligning our cost structure with our current and projected revenue streams, maximizing the value of our licensed back technologies and expanding our business through investment opportunities.

Liquidity and Capital Resources

Compared to January 31, 2008, total assets at October 31, 2008 increased 52.3% to $50.6 million and stockholders' equity increased 48.3% to $41.2 million, primarily the result of the net income. Our cash and cash equivalents at October 31, 2008 was $48.9 million, an increase of 111.2% from $23.1 million as of January 31, 2008, and the ratio of current assets to current liabilities was 8.8:1, which is an increase from the 6.7:1 ratio as of January 31, 2008. The increase was primarily due to the sale of IP to KMC, partially offset by the additional accrued licensing costs associated with the KMC transaction in the first quarter. Our operations used $7.9 million in cash during the nine months ended October 31, 2008, compared to $5.4 million in cash provided by operations during the nine months ended October 31, 2007.

During the nine months ended October 31, 2008, $0.03 million in cash was provided by our investing activities, primarily the result of the sale of operating equipment as a result of the restructuring. We have not historically purchased, nor do we expect to purchase in the future, derivative instruments or enter into hedging transactions.

At October 31, 2008, our principal source of liquidity, cash and cash equivalents was $48.9 million, an increase of $25.7 million from January 31, 2008. We do not have a credit facility. We may require additional long-term capital to finance working capital requirements. See "Risk Factor - Our existing capital resources may not be sufficient and if we are unable to raise additional capital, our business may suffer."

On April 30, 2008, we consummated the transactions contemplated by that certain Asset Purchase Agreement, dated as of January 9, 2008, between KMC and Peerless, pursuant to which we sold substantially all of our IP to KMC, transferred to KMC thirty eight (38) of our employees, licensed the IP back from KMC on a nonexclusive, worldwide, perpetual and royalty free basis subject to certain restrictions, entered into a sublease pursuant to which we are subleasing to a subsidiary of KMC 16,409 square feet of office space at our executive offices for a period of forty (40) months at a monthly rent equal to the allocable portion of the rent and common charges payable by us under our lease for the property, and terminated substantially all of our existing agreements with KMC. As consideration for the sale, KMC assumed certain of our liabilities, and paid us approximately $37.0 million, less a holdback amount of $4.0 million relating to potential indemnification obligations. The cash proceeds generated from the KMC transaction will position us to continue executing our strategic plan. A certain portion of the net proceeds from the KMC transaction will be used for general corporate purposes, including satisfying our working capital needs and paying our remaining liabilities as they come due, relating to the assets that we retain following the consummation of this transaction, including our rights under our sublicenses with Adobe Systems Incorporated and Novell, Inc. and our customized intellectual property.

In addition to the net proceeds that we received from the KMC transaction, as a result of the KMC transaction our operating costs and selling, general and administrative expenses have significantly decreased, freeing up additional capital which will permit us to pursue our long term goal of providing new growth opportunities and a diversified revenue base. We intend to aggressively seek investment opportunities leveraged by the infusion of capital resulting from this transaction. Our long term strategy includes diversifying our business to better ensure growth and profitability.

Critical Accounting Policies

"Management's Discussion and Analysis of Financial Condition and Results of Operations" addresses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments. Management bases its estimates and judgments on historical experience and on various other factors that they believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Management believes the following critical accounting policies, among others, affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

We account for our software revenues in accordance with Statement of Position, or SOP, 97-2, "Software Revenue Recognition", as amended by SOP 98-9, Staff Accounting Bulletin No. 104, "Revenue Recognition", and Emerging Issues Task Force 99-19, "Reporting Revenue Gross as a Principal versus Net as an Agent." Over the past several years, we entered into block license agreements that represent unit licenses for products that will be licensed over a period of time. In accordance with SOP 97-2, revenue is recognized when the following attributes have been met: 1) an agreement exists between us and the OEM selling product utilizing our intellectual property and/or a third party's intellectual property for which we are an authorized licensor; 2) delivery and acceptance of the intellectual property has occurred; 3) the fees associated with the sale are fixed and determinable; and 4) collection of the fees are probable. Under our accounting policies, fees are fixed and determinable if 90% of the fees are to be collected within a twelve-month period, in accordance with SOP 97-2. If more than 10% of the payments of fees extend beyond a twelve-month period, they are recognized as revenues when they are due for payment, in accordance with SOP 97-2.

For fees on multiple element arrangements, values are allocated among the elements based on vendor specific objective evidence of fair value, VSOE. We generally establish VSOE based upon the price charged when the same elements are sold separately. When VSOE exists for all undelivered elements, but not for the delivered elements, revenue is recognized using the "residual method" as prescribed by Statement of Position 98-9. If VSOE does not exist for the undelivered elements, all revenue for the arrangement is deferred until the earlier of the point at which such VSOE does exist for the undelivered elements or all elements of the arrangement have been delivered, unless the only undelivered element is a service in which revenue from the delivered element is recognized over the service period.

Our recurring product licensing revenues are dependent, in part, on the timing and accuracy of product sales reports received from our OEM customers. These reports are provided only on a calendar quarter basis and, in any event, are subject to delay and potential revision by the OEM. Therefore, we are required to estimate all of the recurring product licensing revenues for the last month of each fiscal quarter and to further estimate all of our quarterly revenues from an OEM when the report from such OEM is not received in a timely manner. In the event we are unable to estimate such revenues accurately prior to reporting financial results, we may be required to adjust revenues in subsequent periods. Actual results have historically been consistent with management's estimates.

We provide an accrual for estimated product licensing costs owed to third party vendors whose technology is included in the products sold by us. The accrual is impacted by estimates of the mix of products shipped under certain of our block license agreements. The estimates are based on historical data and available information as provided by our customers concerning projected shipments. Should actual shipments under these agreements vary from these estimates, adjustments to the estimated accruals for product licensing costs may be required. Such adjustments have historically been within management's expectations. However, product licensing cost increased by $0.4 million during the third quarter of fiscal 2007 as a result of a change in estimate reported by one of our OEM customers, decreased by $0.3 million in the fourth quarter of fiscal 2008 as a result of the settlement of differences arising from a third party licensing agreement review and increased by $2.4 million in the first quarter of fiscal 2009 resulting from the KMC transaction.

At October 31, 2008, we had determined that it was more-likely-than-not that approximately $4.30 million of certain deferred tax assets would be realized in connection with the close of the sale of the Company's IP to KMC. Accordingly, we reversed a portion of its valuation allowance during the fourth quarter of fiscal 2008 and made adjustments due to a new California law during the third quarter of fiscal 2009. We realized the deferred tax asset during the nine months ended October 31, 2008. At October 31, 2008 we continue to maintain a valuation allowance for certain of our deferred taxes assets as we are not able to establish that it is more-likely-than-not they will be realized

We grant credit terms in the normal course of business to our customers. We continuously monitor collections and payments from our customers and maintain allowances for doubtful accounts for estimated losses resulting from the inability of any customers to make required payments. Estimated losses are based primarily on specifically identified customer collection issues. If the financial condition of any of our customers, or the economy as a whole, were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required. Actual results have historically been consistent with management's estimates.

On February 1, 2006, we adopted SFAS No. 123(R) using the modified-prospective transition method. Under this method, prior period results are not restated. Compensation cost recognized subsequent to adoption includes: (i) compensation cost for all share-based payments granted prior to, but unvested as of January 31, 2006, based on the grant date fair value, which is determined in accordance with the original provision of SFAS No. 123 using a Black-Scholes option pricing model, and (ii) compensation cost for all share-based payments granted subsequent to February 1, 2006, based on the grant-date fair value, which is determined in accordance with the provisions of SFAS No. 123(R) using a Black-Scholes option pricing model to estimate the grant date fair value of share-based awards.

We use our actual stock trading history as a basis to calculate the expected volatility assumption to value stock options. The expected dividend yield is based on our practice of not paying dividends. The risk-free rate of return is based on the yield of U.S. Treasury Strips with terms equal to the expected life of the option as of the grant date. The expected life in years is based on historical actual stock option exercise experience.

SFAS No. 123(R) requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. If actual forfeitures vary from our estimates, we will recognize the difference in compensation cost in the period the actual forfeitures occur.

Upon adoption of SFAS 123(R), we changed our method of attributing the value of stock-based compensation expense from the multiple-option (i.e. accelerated) approach to the single-option (i.e. straight-line) method. Compensation expense for share-based awards granted through January 31, 2006 will continue to be subject to the accelerated multiple-option method, while compensation expense for share-based awards granted on or after February 1, 2006 will be recognized using a straight-line, or single-option method. We recognize these compensation costs over the service period of the award, which is generally the options vesting term of four years.

On February 1, 2007, we adopted FIN 48. See "Item 1. Financial Statements - Note
7. Income Taxes" for further information.

Results of Operations

Comparison of Quarters Ended October 31, 2008 and 2007

                                                Percentage of          Percentage
                                               Total Revenues            Change
                                                Three Months          Three Months
                                                    Ended                Ended
                                                 October 31,            July 31,
                                               2008        2007      2008 vs. 2007
      Statements of Operations Data:
      Revenues:
      Product licensing                            80 %       66 %              (30 )%
      Engineering services and maintenance         20         34                (91 )
      Hardware sales                               --         --               (100 )
      Total revenues                              100        100                (52 )
      Cost of revenues:
      Product licensing                            32         23                385
      Engineering services and maintenance         11         17                (94 )
      Hardware sales                               --         --                  0
      Total cost of revenues                       43         40                (36 )
      Gross margin                                 57         60                (65 )

      Research and development                      7         17                (70 )
      Sales and marketing                          17          8                (40 )
      General and administrative                   56         20                 10
      (Gain) loss on sale of assets                --         --                 --
      Restructuring                                45         --                 --
                                                  125         46                (23 )

      Income (loss) from operations               (68 )       15               (214 )
      Other income (expense), net                  21          3                 86
      Income (loss) before income taxes           (47 )       17               (172 )
      Provision (benefit)for income taxes          24          0               (900 )
      Net income (loss)                           (71 )%      17 %             (143 )%

Our net loss in the third quarter of fiscal year 2009 was ($1.2) million, or ($0.06) per basic share and ( $0.06) per diluted share, compared to a net income of $1.3 million, or $0.07 per basis share and $0.07 per diluted share, in the third quarter of fiscal year 2008.

Consolidated revenues were $1.6 million for the third quarter of fiscal year 2009, compared to $7.4 million for the third quarter of fiscal year 2008. Licensing revenues decreased $3.6 million in the third quarter of fiscal year 2009 due primarily to a decrease in block licensing revenue resulting from a decline in the demand for our technologies and services. Engineering services and maintenance revenues decreased $2.2 million, primarily as a result of the sale of our IP to KMC, resulting in the transfer of engineering and support staff to KMC and the termination of the development efforts being performed for KMC.

Total cost of revenues were $0.7 million in the third quarter of fiscal year 2009, compared to $3.0 million in the third quarter of fiscal year 2008. Product licensing costs decreased $1.2 million in the period primarily due to the lower level of licensing revenues. Engineering services and maintenance costs in the third quarter of fiscal year 2009 decreased $1.1 million compared to the third quarter of fiscal 2008 due to the transfer of employees to KMC.

Our gross margin decreased to 57% in the third quarter of fiscal year 2009 compared with 60% in the third quarter of fiscal year 2008. The decrease in fiscal year 2009 was due primarily the higher ratio of third party technologies associated with this fiscal quarter's licensing revenues compared to last year's third fiscal quarter.

Total operating expenses for the third quarter of fiscal year 2009 decreased 39.4% to $2.0 million, compared with $3.4 million for the same period one year ago due mainly to the staffing reductions associated with the KMC transaction. As set forth more specifically below:

• Research and development expenses decreased 90.3% to $0.1 million in the third quarter of fiscal year 2009 from $1.3 million in the comparable quarter of fiscal year 2008. The decrease in staffing that has occurred over the last fiscal year was the primary reason for the decline in research and development expenses.

• Sales and marketing expenses decreased 55.9% to $0.3 million in the third quarter of fiscal year 2009 from $0.6 million in the comparable quarter of fiscal year 2008, due to lower sales and staffing reductions.

• General and administrative expenses decreased 38.6% to $0.9 million in the third quarter of fiscal year 2009 from $1.5 million in the comparable quarter of fiscal year 2008. The decrease is result of the decreased executive staffing and a lower level of professional fees associated with the lower level of business activity.

• Restructuring charges were $0.7 million in the third quarter of fiscal year 2009, primarily as a result of severance costs resulting from the reduction in staffing levels.

The effective income tax rate was 52.1% for the third quarter of fiscal year 2009 compared to 0% for the third quarter of fiscal year 2008. The increase in the effective income tax rate is primarily due to the reversal of the valuation allowance in the fourth quarter of fiscal 2008 and the gain on the sale recorded on the KMC transaction in fiscal year 2009. The current quarter reflects a provision for income taxes that resulted from a change in the California tax code resulting in higher taxes on the gain recorded in the first quarter of this fiscal year. In the prior year the tax provision was based primarily on the alternative minimum tax as there were net operating loss carryforwards and tax credits sufficient to offset profits, which minimized income tax expense.

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